CME Tweaks FX Options

CME Group is set to change the strike price listing for certain FX options contracts in a bid to offer more granularity on these products.

Essentially, the exchange is reducing the number of steps above and below the at–the–money strike, while also reducing the strike increments.

So, for AUD/USD, instead of 21 steps at $0.50 increments above and below the at–the–money strike, there will be eight steps above and below at $0.25 increments and then 10 steps at $0.50 increments for all weeklies and front monthly contracts. For non-front serials and quarterly contracts there will be 10 steps above and below the at-the-money strike at $0.50 increments and then 10 steps after that at $1 increments.

These changes will initially go into effect for AUD/USD and CAD/USD on March 11, and then for EUR/USD and JPY/USD starting March 31. On the latter date, CME is also reducing some of the out–of–the –money strikes that are not traded for the GBP/USD, CHF/USD, NZD/USD and MXN/USD contracts to optimise liquidity and marketmaker quoting. These contracts do have user defined functionality though, which means that any user can request a specific strike to be quoted.

“When you think about electronic marketplaces for FX options there are a lot of different inputs and different price points, and what we’re doing is optimising how these products are traded. By giving these users more precision, we’re hoping that these changes will enable them to trade more, allow more spread opportunities and at the same time, reduces our strike count at the longer dates to optimise the trading engines,” says Paul Houston, executive director, global head of FX at CME, when explaining the new changes to Profit & Loss.

The challenge for any electronic platform offering FX options trading is that the product has to have enough flexibility to be genuinely useful to endusers, but if it is too bespoke, then it could lack the broad appeal needed to build liquidity.

“It’s about finding a balance between offering a product that is standarised, but also flexible enough to offer to a broad range of end users,” says Houston.

He is quick to add that on-exchange options contracts will never be able to replicate the highly bespoke nature of the OTC market, but says that where they can act as an adequate proxy it might make more economic sense for market participants to use them, particularly as uncleared margin rules kick-in for buy side firms trading FX NDFs and options in September 2019 and 2020.

“Customers trading options may be impacted by uncleared margin rules and relatively higher capital costs. Given that we are a major electronic venue offering all-to-all liquidity in FX options, we felt that making a few changes in our product, combined with the capital strengths of futures and the transparency of an electronic all-to-all marketplace, there is potential to help customers by offering a more efficient alternative,” says Houston.

CME is also still in the process of making another significant change to its FX options contracts. In August 2018, Profit & Loss reported that the exchange planned to alter the expiry time for these contracts from 2pm Chicago time to 10am New York time, in order to more closely align with the OTC market. This change has been introduced during a phased in process, which is set to complete on June 9.